Northwest Pipe Company
Q1 2020 Earnings Call Transcript

Published: 9 May 2020

[Operator:]

Good morning and welcome to Northwest Pipe Company’s First Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.I would now like to turn the conference call over to Mr. Scott Montross, President and CEO of Northwest Pipe Company. Mr. Montross, the floor is yours, sir.

[Scott Montross:]

Good morning and welcome to Northwest Pipe Company’s first quarter 2020 earnings conference call. My name is Scott Montross, and I am President and CEO of the company, and I am joined today by Aaron Wilkins, our Chief Financial Officer. By now, all of you should have access to the earnings press release, which was issued yesterday, May 7, 2020, at approximately 4

[Aaron Wilkins:]

Thank you, Scott. I’m pleased to be here with everyone this morning. As many of you know, I’ve been with Northwest Pipe Company for over 6 years now, having previously served as the Vice President of Finance and Corporate Controller. I’m very excited to learn the different facets of the CFO role. I would also like to thank Robin Gantt with whom I’ve worked very closely for over 12 years of my career. The company truly appreciates her contributions and her leadership over the years.Now let’s turn to our results. Adjusted net income for the first quarter of 2020 was $3.2 million or $0.33 per diluted share compared to net income of $2.2 million or $0.22 per diluted share for the first quarter of 2019. Adjusted net income excludes unique items and is provided for comparability against the results from the year ago period. The adjustments include $2.5 million in transactions costs associated with our acquisition of Geneva; $0.6 million in purchase accounting-related charges for those recently acquired assets; $0.4 in incremental production costs resulting from the Saginaw fire, partially offset by $0.9 million in the estimated tax impact of the aforementioned items. There were not any comparable adjustments in the first quarter of 2019.Our first quarter sales increased 10.0% to $68.9 million compared to $62.6 million in the first quarter of 2019 due to an $8 million contribution from our acquisition of Geneva Pipe and Precast assets. Legacy revenues declined slightly from the year ago quarter due to a 12% decrease in the tons produced, partially offset by 10% increase in selling price per ton.Gross profit increased 45.8% to $9.6 million or 13.9% of sales compared to $6.6 million or 10.5% of sales in the first quarter of 2019, primarily due to improved legacy pricing and the positive margin contribution from Geneva. Our first quarter 2020 gross profit included $0.5 million of acquisition-related adjustments and $0.4 million in incremental production costs related to the fire at our Saginaw facility in April 2019.Without the aforementioned costs unique to the first quarter of 2020, our gross margin, as a percent of sales, would have been 15.1%. We believe we have now incurred essentially all of the incremental costs on the projects affected by the Saginaw fire. Between the property and business interruption elements of our claim, approximately $3 million of costs remain unrecovered. Based on discussions with the insurance adjusters, we expect to achieve final settlement of this claim in the coming months.Selling, general and administrative expenses were $7.9 million in the first quarter of 2020 as compared to $4.2 million in the first quarter of 2019. The increase was primarily due to $2.5 million in transaction costs related to our Geneva acquisition, coupled with higher incentive compensation expenses. We expect quarterly SG&A expenses to be between $5 million and $5.5 million for the balance of the year.Our unusually high income tax rate of 45.6% in the first quarter of 2020 was primarily due to nondeductible expenses associated with the acquisition of Geneva, coupled with proportionally low pre-tax income. This compares to equally unusual income tax rate of 8.1% in the first quarter of 2019, which was impacted by estimated changes in our valuation allowance. For the full year of 2020, we expect our income tax rate to be approximately 27%.Now turning to our balance sheet and cash flow. In the first quarter, we financed the $49.4 million acquisition of Geneva through a combination of cash on hand and our revolving line of credit, and concurrently amended and extended our credit agreement with Wells Fargo. Among other modifications, the amendment increased the aggregate loan amount from $60 million to $90 million included a term loan that we have since drawn down and extended the maturity date by 1 year to October 2024.Total liquidity available at March 31 was approximately $70 million, with nearly $10 million in cash and $60 million available on our line of credit. Total debt at March 31 was $15.9 million. Our senior leverage ratio was negligible, and we expect to remain in compliance with our covenants for the remainder of the year. Our vigilant approach to managing our current assets is well suited for this type of economic environment.Cash collections to this point of the pandemic have exceeded our expectations, and our percent current on open accounts receivable remains well above the goal we set for the company back in December. Given these factors, we believe that we are well positioned to face the challenges presented by these uncertain times and currently do not anticipate seeking government sponsored loans under the CARES Act.We generated cash flows from operations of $15 million during the first quarter of 2020. Depreciation and amortization were $3.4 million, which included the amortization of newly acquired intangible assets. In addition to $23 million of goodwill, the company’s preliminary purchase accounting for the Geneva transaction brought on $11.2 million in intangible assets. The resulting rate of amortization is expected to be approximately $0.6 million per quarter for the balance of the year, up from the prior quarterly rate of about $50,000 per quarter. The increase in the rate of depreciation and the fair value step-up was not material.Capital expenditures totaled $2.9 million for the quarter, which were primarily used for ongoing maintenance CapEx. We expect to remain conservative in our capital allocation philosophy in the current environment with a focus on cash preservation in the near-term. For the full year of 2020, we have planned approximately $10 million to $12 million of total capital expenditures, which will be utilized for ongoing projects and necessary maintenance capital spending, while the first quarter has historically been a seasonally slower quarter, the hard work and dedication of our employees helped us deliver solid first quarter financial results.We are very pleased to have completed the acquisition of Geneva, including all of the talented employees now integrating into our collective culture. We are confident our introduction into the precast concrete market will diversify our business and provide longer-term growth prospects.Thank you again to all of our employees for your ongoing commitment to making Northwest Pipe company a safe place to work.Now, I’ll turn it over to the operator to begin the question-and-answer session.

[Operator:]

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] At this time, we will just pause momentarily to assemble our roster. And the first question we have will come from Zane Karimi of D.A. Davidson. Please go ahead.

[Zane Karimi:]

Hey, good morning, Scott and Aaron. Hope you and yours are staying healthy through this time.

[Scott Montross:]

Hey, Zane. How are you doing? Same to you.

[Zane Karimi:]

Thank you, thank you. First off, 1Q it kind of sound like core business down a little with the Geneva acquisition, providing the growth for the quarter. So through the next couple of quarters, how are you thinking about growth in the legacy business? And given, Geneva is about $43 million I think it was 2019 res. Is that something we should expect to be kind of replicated through 2020?

[Scott Montross:]

Well, what I’ll say right now is things look okay. It’s you got a good solid backlog like we’ve had for the last several quarters. This is the second highest first quarter ending backlog that we’ve had in the last 10 years and the only one that was higher was the previous year. So we believe that the business level, as it stands right now, looks relatively stable, as we’re moving forward. But the bidding is actually quite large with somewhere between 205,000 and 209,000 tonnes bidding this year. And the first quarter was relatively small.So from the perspective of the way the structure of the business looks from backlog, from bidding, in how things are moving forward. Things look okay. Problem is being able to project what things are going to look like with the uncertainty around the coronavirus and the environment that it’s created. So it’s really difficult to give an absolute picture of it. But all the structure is there for the business to continue to carry on quite well. It’s just if jobs don’t push, things don’t get delayed. We saw some delays in the first quarter. Some of which were weather related delays that hurt the revenue and gross profit in the first quarter a little bit.But we also saw some jobs that were delaying related to the coronavirus, especially work that may be being done in and around New York City, things like that. So there’s a myriad of factors here, but all of the structure is there for the business to remain really solid all the way through this year. It’s just how does the virus impact the total environment.

[Zane Karimi:]

Thank you for that. And then, I guess, in the prior quarter, we were kind of talking about an environment conducive to that 20% or greater gross margin, developing through kind of this year. However, given the COVID slowdowns, we just kind of talked about potential, right, in the latter part of the year. How should we be thinking about the current business pricing environment? And like, kind of how are you able to leverage the fixed cost aspect of business? And will these margin levels more likely be pushed out?

[Scott Montross:]

Well, again, there is a lot of things that end up affecting what the margin levels are. Especially, when you look at what went on from the fourth quarter of 2019 to the first quarter of 2020. And so we end up with margin levels that are in the 15% range, which are pretty average margins. But the weather delays that I talked about, creating a bunch of problems in the first quarter. One, the weather we had in Texas caused us to have to get off of some relatively large running jobs, because the installation couldn’t be done in the field.So we were switching to some smaller jobs and switching into some other things that what it does is create less efficiency. And you get a little bit more overhead absorption issues when you start doing that, because you have less direct hours. Then we had some jobs, because of weather push-out, and that started early as we thought. And that also affected the amount of direct labor and in the amount of changeovers being done.So we had a lot of that impact going on and then ended up with a 15% margin. We think margin levels are relatively stable, as long as production levels continue to pick up in the near term, I think the margin levels look reasonable, with maybe a little bit of upward potential. The thing, again, that you can’t tell is how much more impact will the coronavirus have on this. And the hardest thing is like I said before, things look pretty okay right now, but it’s just the things in front of us that we can’t predict that makes it a little bit more difficult to give any kind of clear picture and – which is why we’re reluctant to give any kind of forward projections now because none of us have been in this kind of situation before. In fact, I don’t – nobody’s been a lot – nobody is live now that – or very few people are alive that are from the Spanish flu outbreak, but nobody has ever seen this before. So it’s a little bit difficult to predict. But again, like I said, the structure of the business looks solid.

[Zane Karimi:]

Great. I appreciate it. Thank you for the color there.

[Operator:]

And next, we have Gus Richard of Northland.

[Gus Richard:]

Yes. Thanks for taking my question. In terms of the backlog, is there any Geneva backlog in that $224 million number?

[Scott Montross:]

No. Geneva is a little bit of a different business as far as the way the orders work, Gus. It’s got significantly more velocity. It’s much more transactional. So they just really have an order book, and we don’t count that in our steel pressure pipe backlog because, as you know, the steel pressure pipe backlog is longer-term projects, a lot of them.

[Gus Richard:]

Got it. That makes sense. And then in terms of the reclamation project in California, is that all pressure pipe? Or is it some precast concrete work as well?

[Scott Montross:]

From the perspective of the ones that we’re looking at, pretty much all of it is precast – or excuse me – steel pressure pipe.

[Gus Richard:]

Okay. Okay. Is there an opportunity to get some of the precast work in that those reclamation projects? Or is it difficult to service from Utah, and I think you have some capability in California and Tracy.

[Scott Montross:]

Yeah. We have – the precast concrete market is a pretty localized market. General shipping radiuses are probably 150 miles on reinforced concrete pipe. So it really – it doesn’t shift that far. As far as the Tracy RCP product, that’s a pretty specialized RCP product. It’s a webcast product that’s really for deep, very corrosive soil applications. So that would really fit any of those irrigation district projects. It’s really the steel pressure pipe that fits that.

[Gus Richard:]

Got it. And then last one for me. Obviously, I think California state budget, they’re projecting a $54 billion shortfall. You’ve got quite a bit of business in California. I’m sure other states and municipalities are under pressure. Are you seeing – in talking to your customers, are you seeing any concern about the ability to finance what’s on the backlog and future projects?

[Scott Montross:]

We’re really not seeing any of that at this point related to this COVID-19 virus. The interesting piece when you look at this, and look at the – calling this a recession, and what this looks like, this versus the previous recession in 2008, this would hit much faster. And when you – when the stimulus spending happened at the end of 2008 that was really an infrastructure driven stimulus spend, okay. And this one so far has really been a stimulus so that the taxpayers can carry on with their daily lives as much as possible.The thing about the steel pressure pipe business in large CapEx projects like this is that it’s a little bit different where a lot of these projects, like you’re talking about right now, have momentum behind it. And they’ve been planned out for 2 or 3 years, so there’s probably – and some of them even longer. There’s probably 2 or 3 years of momentum behind this market versus seeing CapEx projects. And the difference between the CapEx and the OpEx is, normally, the OpEx has to keep functioning simply to keep the network operating. And CapEx generally falls off.We think in this case, that the CapEx, which is the stuff that’s going to fall off, will likely be more treatment plant pump stations and things like that will be affected. The network in the delivery and transmission network, which is the pipe and pipe systems, we think it’s going to be less effective. And a lot of that’s due to the failures that we’re seeing in the system. And what’s happening is the pipe network which is generally CapEx, is almost becoming more like operating CapEx, because of all of the failures.So there’s a couple of years of momentum behind the CapEx spending in the pipe jobs that are coming through. And then obviously, you know about the bill that’s – the Senate Environmental and Public Works Committee is bringing to the floor for another stimulus package that is related to infrastructure spending, which I think would cause that momentum to keep carrying through into the future, past that 2 or 3 momentum period that we normally see.

[Gus Richard:]

Got it. Okay, thanks. Thank you. That’s all for me.

[Operator:]

[Operator Instructions] Next we have David Wright with Henry Investment Trust. Please go ahead.

[David Wright:]

Hey, Scott, good morning.

[Scott Montross:]

Hey David.

[Aaron Wilkins:]

Hey David.

[David Wright:]

Hi, Aaron. Welcome. Congratulations.

[Aaron Wilkins:]

Thanks.

[David Wright:]

Just a couple of environment questions. The projects that you’re currently delivering on and that are being installed, I presume they’re all considered essential?

[Scott Montross:]

Yes.

[David Wright:]

Yeah, and so. It’s just when you talk about some delays away from weather-related delays, if the project is essential, then really the only variable is whether enough people are showing up to do the work, right?

[Scott Montross:]

Well, yeah, you can have a little bit of that. You may have a little bit of slowdown in permitting that’s required because of – maybe there’s other people at those offices that aren’t working in the office and they’re working from home. So you can see a little bit of slowdown from that. We’ve seen a little bit of delay like from quarter-to-quarter at this point, but we have seen no cancellations in orders.

[David Wright:]

Yeah, so I know that your customer is basically the GC. But when you’re talking about these projects that you’re bidding on or that you’re going to be bidding on or that you have recently bid on, when you look at them on a look through, what sort of sense do you have on their funding sources? I’m asking the question in relation to the stress on state and local budgets.I presume some of these projects are sold through water district bonds that are authorized by voters maybe or maybe some of the other projects you mentioned have to be authorized by the legislature. What kind of visibility do you have on the ultimate funding of the range of things you’re involved in?

[Scott Montross:]

So the ones that are projects that are – we’re currently producing or that our order is in backlog or that are scheduled to be bidding, really, for the next year and are advertised to bid, are all funded projects. So – and like I said before, that has got some momentum behind it, usually for a couple of years. At least, those projects carry through.As far as the future projects that we talked about in the script, a lot of these projects are based on housing starts and population growth and interest rates and those kind of things. But in which you would expect the housing starts to slow down a little bit. And, obviously, we all know what’s going on with the interest rates. But I think the one thing that we’re seeing and is a constant is the failures of the network, the water transmission delivery network across the United States and the American Society of Civil Engineers is coming out in a couple of – I think there is a couple of [bluefield] [ph] statements saying that this thing is failing.So these projects, I believe, instead of being straight CapEx projects versus other OpEx that’s required to just keep the system moving, are starting to become like operating CapEx. You’re going to have to spend those larger dollars to keep the systems operating or systems are going to continue to fail and we can’t have the water systems across the infrastructure or grid failing in the country. So they’re going to have to fund those projects.

[David Wright:]

And when you were responding to the first caller’s question, when you say the margin levels are stable that production levels pick up, were you saying they were stable at 15%, or that if production levels picked up that the 20% was more possible?

[Scott Montross:]

So you get – we’re at the point, where we’re not going to give forward looking, David, because there’s too many environmental impacts right now. What I would say is that the better the production levels, the better the overhead absorption, the better the impact on what the margins are, because the backlog is still in good shape from a margin perspective.And although, what I would say is there is a little bit of panic out there from some of our competitors right now, I think, based on the environment and what’s going on in the environment. But with the amount of work that’s scheduled, the bid, we think that that should settle down and be okay. So, ultimately, we still believe that there’s margin upward potential here.

[David Wright:]

Thanks for the commentary and good luck.

[Scott Montross:]

Thank you.

[Operator:]

We’re showing no further questions at this time. We’ll go ahead and conclude our question-and-answer session. I would now like to turn the conference call over to Mr. Montross for any closing remarks. Sir?

[Scott Montross:]

Okay. Again, I’d like to thank you all again for joining the call today. Despite the unfortunate circumstances presented by the COVID-19 virus to society and the economy, our enthusiasm through the business going forward remains strong. We ended the first quarter with the 7th consecutive quarter, with a strong backlog of over $200 million. And we see a very, very strong bidding calendar as we go through 2020.And we’re very excited to be a participant in the precast concrete market, made possible through the acquisition of Geneva, and the significant growth opportunities that this market presents. We look forward to speaking with you again on the second quarter call in August. And in the meantime, be safe and stay healthy. Thank you.

[Operator:]

And we thank you, sir, and to the management team for your time also today. Again, the conference call is now concluded. At this time, you may disconnect your lines. Thank you again, everyone. Take care and have a great day.